Anyone betting that Roche Holding’s negotiations to buy the rest of Genentech will be a painless affair might find themselves swallowing a bitter pill.

Associated Press

The process of buying out minority shareholders when you already own a majority stake in a company (sometimes referred to as a squeeze out) is a delicate one. Any hint that the controlling shareholder got a sweetheart deal is sure to result in a flurry of shareholder lawsuits. Another burden would-be acquirers like Roche face is the inevitable perception by some that its position as an insider at the target company gives it an unfair advantage in the negotiations.

That is why negotiations between Roche, the Swiss pharmaceutical giant, and Genentech will be handled by a panel of the biotechnology company’s three independent directors. (It has a total of seven, three appointed by Roche.)

Such panels are known to drive hard bargains. A case in point is the experience of the Dolan family, which has made four offers to buy the rest of Cablevision, the New York cable company they control. All four were shot down by that independent panel.

It is clear this is going to be an expensive, time-consuming affair. Roche will want to keep the negotiations from getting testy as the staid Swiss giant already is going to have its work cut out integrating a company known for its freewheeling culture. The longer it takes to complete the buyout process, the greater the risk of losing Genentech’s human capital.

Roche clearly foresaw the challenges inherent in the bold move it sprung on the market today. Should it fail in securing approval from a majority of Genentech’s minority shares, Roche has an alternate route to secure its prey. According to Genentech’s most recent proxy statement, two investment banks would then be appointed to value its shares and determine the price Roche would have to pay to secure full ownership. Of course, that option could become pricey. Just look at the experience of Sprint Nextel, which was forced following a lengthy appraisal process to buy out its Nextel Partners affiliate for $6.5 billion, a valuation an analyst at the time called “ridiculously high.”

Highlighting the sensitivity involved in an approach like this is the fact that Roche only reached out to Genentech Sunday following months of internal deliberations. It notified the independent directors and made a courtesy call to Arthur Levinson, Genentech’s chairman. Roche Chairman Franz Humer called Levinson Sunday and they had a “constructive” conversation, Roche CEO Severin Schwan said in an interview. Humer plans to meet Levinson in California Tuesday.

Any sense that Genentech officials are giving their prospective new (full) owners special treatment to the detriment of minority shareholders would just provide fodder for the inevitable lawsuits. Schwan also cited risk of a leak as a reason for not giving Genentech honchos a heads-up sooner.

Not surprisingly, the market expects that the current Roche offer isn’t its last. Investors drove up Genentech’s stock more than $3 above Roche’s $89-a-share offer.

According to Dealogic, the average premium offered in similar squeeze-out deals is 21% this year, well above the 9% offered by Roche. Based on the average share price over the past month, the Roche premium is a little more in line with the recent past, at 19% compared with 24%.

Not surprisingly, Schwan refused to be drawn out on a possible price increase, saying only: this is a “fair and generous” offer, especially given Roche already has control of Genentech.

Whatever happens, the question is most likely not whether a deal for full ownership of Genentech will ultimately be struck, but at what price.

As one experienced M&A lawyer said Monday of Roche, one of the world’s most successful pharmaceutical companies: “I’d be surprised if they started it and were not able to finish it.”

–With Jeanne Whalen